Hospital All-In Cost of Debt Lowest Ever

Bond markets gods are smiling upon not-for-profit hospitals right now. The tax-exempt MMD benchmark is near its all-time low, and when combined with compressed credit spreads, hospitals can lock in the lowest cost of funds on record.

Add compressed credit spreads to the MMD, and hospitals have the recipe for the lowest borrowing cost on record.

Chart: Hospital all-in yields.

How low?

All-in rates are so low that many advance refundings are producing solid savings in spite of call dates going out two or more years.

If eligible for an advance refunding, bonds are defeased by funding an escrow to pay debt service until the bonds are actually called on their first call date. Once the escrow is funded, the old bonds are taken off the hospital's balance sheet and no longer count as part of the hospital's debt.

In today's low rate environment, advance refunding escrows earn much less than what is needed for debt service (negative arbitrage). But in many cases, the sizeable coupon savings can more than make up for the escrow costs, and hospitals still achieve attractive savings even with long escrow periods.

While there are many hospitals holding back while waiting for the dust to settle on health care reform and changes in reimbursement, some of the larger providers have already jumped on the opportunity to lock in today's cost of funds, whether to refinance existing debt, or to fund needed capital projects.

For hospitals and other municipal borrowers, It's a good time to be the bond markets.